Do's and Don'ts for Establishing or Rebuilding Credit

There are lots of reasons you may need to build or rebuild a healthy credit rating. Maybe you're young and new to the world of credit. Or maybe you're "starting over" after some rough financial times. Either way, there are right ways and wrong ways to go about it.

Living your life on a "cash-only" basis, or trying to, is not a bad way to go. But almost everyone, at some point in their lives, will need a good credit rating in their corner. If you plan to apply for a mortgage or get a loan to buy a car, you'll need to have a history. The National Foundation for Credit Counseling (NFCC) suggests that consumers consider the following tips when applying for credit:

• DO obtain a copy of your credit report from www.annualcreditreport.com. If you're looking to rebuild your credit, this is especially important, as it will help you review your existing debts and see what needs to be done before you can move forward.

• DO open checking and savings accounts. Lenders may inquire about such accounts on credit applications. Having them in place can count in your favor.

• DON'T apply for too much credit at once. Too many credit inquiries can have a negative impact on your credit score, because it can make you look desperate or irresponsible.

• DO apply for a variety of credit types. Having different types of credit can improve your score. Having some revolving accounts (e.g., credit cards) and some installment fixed payment loans (e.g., a car payment) can be an advantage.

• DO research the type of card that is right for you. Each issuer has different lending standards — and yes, a credit card is a type of loan. Familiarize yourself with sthe different standards and apply for cards with lending profiles that fit you. Learn more by going to www.creditcards.com or www.bankrate.com.

• DON'T fall for a credit repair scheme. Why pay for something that you can do for yourself for free? Be patient, time is your friend. The further you move from your bad credit history, the less negative impact it has. Be responsible with your new credit, and you'll soon have a solid credit file.

• DON'T pay to piggyback. "Piggybacking" allows someone with existing credit to add an authorized user to their account. The credit activity is then reported in the primary cardholder's name as well as the authorized user's name. This is a legitimate way to build a credit history, but only if you do it properly. Examples are adding a young adult on a parent's card, or a spouse on the other spouse's card. The wrongful use would be when strangers offer to piggyback on their account for money.

• DO consider a co-signer. Using a co-signer to secure a loan in the absence of any credit history can be an effective way to help another person obtain and build credit. But there is some risk to the co-signer. These loans are typically structured so the primary borrower is expected to make the payment, with the pay history reported in both names. If the borrower defaults, the co-signer becomes responsible, and any missed payments will be reflected on both credit files.

• DO consider a secured credit card. This type of account is secured by a deposit made to the issuing bank. For example, to get a card with a $500 limit, you would deposit that amount with the bank. It's a good way to build credit, but the downside is that these accounts typically involve fees, and often have higher interest rates. Account activity is reported to credit bureaus, and once you've shown the issuing bank that you can responsibly make regular payments, it will often offer the borrower an unsecured card.

• DO take out a small loan. A personal loan from a bank or credit union can serve to establish credit. You may be asked to put up collateral, but it will be worth it in order to build your credit.

• DO pay all your bills on time. Credit bureaus monitor this activity, so make sure to stay up-to-date on all your monthly payments, including rent, utilities, etc.

Additionally, if you have debts you're having trouble repaying, DO consider working with a credit counseling agency like CCCS to set up a Debt Management Plan (DMP). With a DMP, the counseling agency works with your creditors to establish new terms for repayment and will facilitate future payments on your behalf. Once these terms are accepted by the creditor, they are reported to the credit bureau as the new monthly payment.

As long as you make consistent monthly payments to the agency, and those payments are made in a timely manner, most creditors will report the consumer as current to the credit bureau, which will help you reestablish a good credit rating. Consumers who complete the Debt Management Plan usually have little trouble obtaining new credit. In addition to being approved for credit cards, many go on to purchase houses and cars.

Many people wonder if consulting with a credit counseling agency will affect their credit score. The short answer is no. Simply obtaining counseling has no bearing on your credit score, as it is not reported to the credit bureau. So please, don't hesitate to reach out to CCCS for guidance. We're here to help.